The real estate marketplace includes times of significant sales and refinancing and times of significant mortgage foreclosures. Each can, at times require an accurate estimation of a current value of a property.
Some instance may include a scenario where a borrower has improved a property and would like to additionally leverage the improved value of the improved property. In such cases, the borrower will typically wish to secure the additional monies as quickly as possible.
In other instances a property owner may be either unable to pay a mortgage due or decide not to pay on the mortgage note. Such situations generally position both the lender and the borrower in a deleterious position. The lender is faced with the unprofitable task of foreclosing on the property and then selling it at auction, which generally results in a financial loss to write off. The borrower faces the impact of being associated with a foreclosure on the property, which amongst other things, may negatively impact their credit rating.
One possible way to avoid the negative effects to both the borrower and the lender is to find a buyer to purchase the property prior to foreclosure. Such distressed properties are often in a state of disrepair and require a buyer willing to assume a “fixer up” project. If a transaction can be arranged, the buyer is provided with an opportunity to repair and improve the property and hopefully generate a profit for their effort. However, few buyers willing to assume this type of effort have the financial means to fund the purchase of the property and the distressed state of the property often results in an appraisal value which is not high enough to secure traditional purchase money financing, no less finance the needed repairs.
The majority of real estate mortgages are structured to support the purchase of a property based upon the inherent value of the property at a time of mortgage initiation. A small percentage of real estate mortgages are structured to support acquisition a real estate property and improvement of a property. Such distressed property loans consider the value of the property in the improved state based upon the proposition that the improvement imparts additional value to a property. They are generally associated with higher risk and left largely un-served by traditional financial institutions. As a result, interest rates for such loans may be double, or more, than the interest rate for a traditional mortgage and also include substantial points. Such rates are sustainable because the loans are often short term and the potential profit on the property resale absorbs the points.
Despite the potential profit from making loans on distressed properties, traditional banks and mortgage companies generally due not originate them because they do not fit their traditional product structures. The underlying collateral pre-restoration is not readily marketable on a retail basis and in come cases may be uninhabitable in a condition at closing. In addition, secondary markets do not exist for commercial-type mortgages on unoccupied residential properties, which means that these loans cannot be packaged and sold in the capital markets. In addition, traditional mortgage operations are not designed for rapid closings and payments of small construction draws which are generally required to address the circumstances associated with distressed properties.
The result of the unique conditions associated with distressed properties is a marketplace which remains highly fragmented and uncertain. Lenders for such loans are usually associated with a wealthy individual and work with a small number of known borrowers with a proven track record. This can make it difficult for an entrepreneurial minded person to break into this marketplace. In addition, an owner of a distressed property is faced with few, if any options for sale of their property.